Holiday Wishes and… Ugh, A Tax Update for 2007

THIS IS THE DAY TO:

• Take a walk
• Take a stroll

A brisk pace won’t hurt either. Take the long way around today. Maybe even just climb the stairs a couple of extra times.

REMEMBER: For each hour of regular, vigorous exercise, you gain two hours of life expectancy.

JUST DO IT NOW!!

Drum roll… Next… THE UGH PART

It’s now 136 Days Away And Counting: April 15th. So, we’d better get on with the tax stuff:

Changes for the tax year. As you ready your paperwork for yourself or your accountant, you may want to bear in mind the following shifts for 2007.

The IRS briefly highlights these initial key changes:

• Self-employment tax—The maximum amount of self-employment income subject to Social Security taxes increases to $97,500 in 2007, up from $94,200 in 2006. The self-employment tax rate remains 15.3% on earnings to the Social Security maximum and 2.9% after the maximum.

• Social Security tax—The maximum amount of wages subject to Social Security tax increases to $97,500 in 2007, up from $94,200 in 2006. The tax rate remains 7.65% on employers and employees.

• Business standard mileage rate—The standard business mileage rate increases to 48.5 cents per mile for miles driven in 2007 for business, up from 44.5 cents per mile in 2006. (You can deduct the cost of parking and tolls in addition to the mileage allowance.)

• Tax-free parking for employees—Starting in 2007, firms can pay for $215 a month of parking tax free for employees, up $10 per month from 2006. The cap on tax-free transit passes rises to $110 a month, up $5 a month from 2006.

• Section 179 Expense Deduction—The maximum amount of qualifying property placed in service in 2007 that businesses can expense increases to $125,000, a $17,000 up from 2006. The annual investment limit increases to $500,000 for 2007, up from $430,000 the year before. Under the Small Business and Work Opportunity Tax Act of 2007 Special Report, under the new law, the base $100,000 limit ($112,000 as indexed for inflation for 2007) is increased to $125,000 for tax years beginning in 2007 through 2010. In addition, the investment limitation is raised to $500,000 for tax years beginning in 2007 through 2010. The $500,000 amount is indexed for inflation in tax years beginning after 2007 and before 2011.

Other significant changes:

• Help with health care—The Tax Relief and Health Care Act of 2006 made it easier to help employees cover medical coverage through Health Savings Accounts (HSAs). If you pay for a high-deductible (low-cost) health plan, tax-deductible contributions can be made to HSAs to pay medical costs not covered by insurance. Income earned in these accounts then builds up on a tax-deferred basis. Withdrawals to pay medical costs not covered by insurance are tax-free, but unused funds can be withdrawn at any time for any purpose; they are taxed but there is a 10% penalty for withdrawals for non-medical purposes before age 65. For 2007, the annual deduction is up to $2,850 for self-only coverage, or $5,650 for family coverage. The contribution is no longer limited to the policy’s deductible and the contribution need not be pro-rated for those who become eligible for HSAs during the year. Under the new legislation, employees can fund HSAs through a one-time transfer from an IRA, a flexible-spending account or a health reimbursement account; no deduction can be claimed for these funding options.

The IRS outlines a few forward-looking tax issues to consider as well.

• Expiring in 2008:

o Energy-saving improvements to commercial real estate—This special expensing for the cost of energy-saving improvements to commercial building is no longer available after 2007.
o The tax credit for energy-efficient homes—The special credit for builders selling energy-efficient homes expires after 2007.

• Changes for 2009 and beyond:

o Solar heating credit—In 2009, the current 30% tax credit for businesses on the cost of solar heating units and fuel cells falls to 10% for those placed in service after 2008.
o Domestic Production Activities Deduction—Beginning in 2010, this deduction increases to 9% of qualifying business net income from domestic production activities. This deduction applies to businesses engaged in construction, engineering or architectural services; film production; or the lease, rental or sale of equipment manufactured in the United States.
o Decreased Section 179 Expense Deduction—The maximum amount decreases to $25,000 in 2011.
o Withholding on government contracts—Beginning in 2011, amounts paid out under government contracts will be subject to a 3% withholding tax. This will affect contracts with the federal government, state governments and any municipality that pays out $100 million or more annually on contracts (interest and payments for real estate are exempt).